Organization of transaction with options - Iordachi Victoria

Extras din document

1. Trading mechanism of options’ operations. 2. Price formation on options market. 3. Strategies with options within hedging positions on stocks. 4. Mix of options and stocks. 1. Trading mechanism of options’ operations. Option can be defined as an agreement through which one of the party, the option’ seller/writer, sells to another party, the option’s buyer/holder, the right but not the obligation to buy an asset from him, or to sell him an asset, under some conditions (price, maturity etc). Every financial option is a contract between the two counterparties with the terms of the option specified in a term sheet. Option contracts may be quite complicated; however, at minimum, they usually contain the following elements: • the option holder has some rights, whether the right to buy (a call option), or the right to sell (a put option) • the quantity and class of the underlying asset(s) (e.g. 100 shares of XYZ Co. B stock) – support of financial asset. the contract’s size or trading lot is fixed, established in each country differently where such transactions take place • the strike price, also known as the exercise price, which is the price at which the underlying transaction will occur upon exercise. It can be fixed upon the measuring unit of the contract’s object – called unitary price, or upon the whole quantity – aggregated price • the expiration date, or expiry, which is the last date the option can be exercised • the contract’s period of availability (perioada de valabilitate) can be 3, 6 or 9 months, expiring at a certain hour at the date established for each type of contract’s object • premium –the total amount paid by the buyer of the option to the seller to get a right to sell or to buy the support asset • Intrinsic value – the profit gained by the option’s buyer – the difference between the assets’ rate and the exercise price of the call option or the difference between the exercise price of put option and the rate of the support asset. • Time value – the difference between the option’s price and the intrinsic value. It is common only for American options and reflects the hope of a new buyer that the price will rise up within the time interval until the expiration date. Options are standardized contracts, with the underlying assets in form of stocks, bonds, SE indices, interest rates, currency, futures. Within an option contract, the buyer has the right, but not the obligation to purchase or sell at maturity at an established price, by paying a premium at the moment of the contract’s conclusion. For a buyer of an option, the premium is paid indifferently whether the contract is executed or not. ...